Countries that throw off a repressive dictator are too often left saddled with illegitimate and odious obligations. To maintain access to international
credit markets, legitimate successor governments must honor these debts and comply with other contracts negotiated by the prior regime, even if the
proceeds were stolen or used to violently repress opposition.

Syria today epitomizes this mortgaging of the future. The regime of President Bashar Assad has killed thousands of people since protests began last
year. The Arab League, United States, and European Union have condemned the violence and imposed strong sanctions against Syria’s oil sector and
central bank. But these have not stopped the regime from buying weapons from Russia, or from trying to sell to China and other countries the oil the
United States and European Union refuse to buy.

Sanctions have not stopped the Assad regime from buying weapons from Russia, or from trying to sell oil. It’s time to try a new tool that would strengthen existing measures: preemptive contract sanctions.

Preemptive Contract Sanctions

It’s time to try a new tool that would strengthen existing measures: preemptive contract sanctions. This would take the form of a declaration that any new contracts with the Assad regime are illegitimate and need not be honored by a legitimate successor government. Such a declaration would
discourage new contracts with or loans to the regime because of the likelihood that that they would be repudiated by a successor government.

Discouraging new contracts would make it harder for the regime to sustain itself. It could encourage senior officials or military officers to abandon
the regime and cause outsiders considering doing business with the regime to drive a harder bargain. If contracts are signed despite such a
declaration, it would lessen the burden on a legitimate successor government, which could repudiate such contracts without endangering access to
international credit markets.

How would this work? Suppose the United States and the United Kingdom, which are home to the world’s leading financial centers, acting with support of
the European Union and the Arab League, announced that any new contracts signed with the Assad regime are illegitimate. How would governments and firms
considering doing business with Assad respond? Would Russians continue to sell weapons, knowing they might not get paid and that their contract could
not be enforced? Would China and other countries consider investing in Syria’s oil sector, knowing that the contract—and promised oil deliveries—could be
repudiated when the Assad regime falls?

Beyond Trade Sanctions

Unlike traditional trade sanctions, preemptive contract sanctions are self-enforcing. Trade sanctions offer those who violate them a windfall:
potential profits increase since competition from those who comply with the sanctions has been eliminated. In contrast, preemptive contract sanctions
increase the risk for those who would violate them. The incentive to sign a long-term contract with the target regime is decreased.

Who Declares?

In theory, preemptive contract sanctions could work even if the declaration were made only by the governments of the United States and the United
Kingdom, since they are home to the world’s leading financial centers and the courts that enforce international contracts. In practice, however, such a
declaration would be greatly strengthened by an international consensus that includes key developing countries and the endorsement of relevant regional
bodies. This would help to ensure that declaration is made in the interests of the affected country, not the parochial foreign-policy interests of
outsiders. But unlike many trade sanctions, contract sanctions do not require international unanimity—or a UN Security Council resolution—to be
effective.

Criteria for a Declaration

What conditions would define a regime as being so odious that its contracts should be declared illegitimate? A wide body of internationally agreed
norms, charters, and treaties provides some basis for deciding. The CGD Working Group on the Prevention of Odious Debt recommended that a declaration
of illegitimacy and preemptive contract sanctions be considered for use against regimes that

engage in massive corruption and widespread mismanagement of public funds, including placement of public funds in private foreign bank accounts and
using resources to repress the population.

Syria clearly meets at least the first criterion.

Declaring new contracts to be illegitimate may not have large, immediate effects, but it would further isolate the regime and signal that the squeeze will get tighter over time.

Using Every Tool Available

President Barack Obama has called on the United States and its allies to consider “every tool available” to stop the slaughter in Syria. The British
Prime Minister David Cameron has said “Britain needs to lead the way in making sure that we tighten the sanctions, travel bans and asset freezes on
Syria.” Preemptive contract sanctions are a potentially powerful new tool to support these goals. While such a declaration would not have large,
immediate effects, it would further isolate the regime and signal that the squeeze will get tighter over time.

The failure of the international community to stop Assad’s assaults means that more innocent lives will be lost. Calling contracts signed with this
regime, in the midst of such violence, what they are—odious and illegitimate—and raising the risk for companies or governments willing to sign them is
surely worth a try.

Frequently Asked Questions

What is a preemptive contract sanction?

A declaration that any new contracts with, or loans to, a designated illegitimate regime need not be honored by a legitimate successor government.

What value does this add to normal sanctions?

Currently, a country can only directly enforce sanctions against people and companies within its legal jurisdiction; with the result that illegitimate
regimes can still trade with people and companies based in third countries. Paradoxically, the courts of the U.K. and U.S. can, under some
circumstances, be used to uphold and enforce these third-party contracts, even though the same contracts would be illegal and unenforceable for their
own citizens. A declaration that such contracts are odious would extend the effect of sanctions by making it harder or more expensive for the targeted
regime to bypass traditional sanctions by entering into contracts with third parties.

Furthermore, this tool can help alleviate the burden that unjust transactions impose on legitimate successor governments and their citizens by
providing the option for those governments to repudiate odious contracts covered by the declaration without endangering access to international credit
markets.

Which contracts would be covered?

Like normal sanctions, preemptive contract sanctions will vary from situation to situation depending on the circumstance. Largely, they will be
targeted narrowly at particular types of transaction (e.g. arms, oil), organizations (e.g. federal government, or institution) or individuals (e.g.
members of the government and their families). They can also be applied more broadly to whole regimes, but unlike other sanctions, they are still
focused exclusively on public rather than private transactions (unlike the comprehensive U.S. sanctions against Sudan, which prohibit most private
activity as well).

Who makes the declaration?

In theory, preemptive contract sanctions could work even if the declaration were made only by the governments of the United States and the United
Kingdom, since they are home to the world’s leading financial centers and the courts that are the most common venue for adjudicating international
contracts. In practice, such a declaration would be greatly strengthened by an international consensus that includes key developing countries and the
endorsement of relevant regional bodies. Unlike many trade sanctions, contract sanctions do not require international unanimity—or a UN Security
Council resolution—to be effective.

Is this an exercise of extraterritorial power over third parties?

No. It is a change in the rules for cases being pursued in the courts of the countries making the declaration.

Would this create uncertainty about the independence of the U.S. or UK legal system, or undermine their legal services industries?

No. Trust in these legal systems might be undermined if measures were introduced retrospectively; but this is a declaration in advance that a
particular type of contract will not be upheld in future. If anything, this will enhance the predictability of British and U.S. courts. There are
already contracts that cannot be upheld in these courts, for example, contracts involving slavery: this merely extends that category.

Does this undermine contract law, the widespread acceptance of which is a global public good?

No, for two reasons. First, the proposal does not undo existing contracts but declares only those contracts signed after a given date to be
illegitimate and therefore unenforceable; this is not about rescinding existing contracts. Second, there are already many ‘contracts’ which cannot be
enforced in UK and U.S. courts. For instance, a British court will not enforce a contract for slavery, nor a contract with unfair terms (e.g.
unreasonably excluding liability). This tool would extend that principle to exclude the enforcement of contracts with regimes which have been declared
illegitimate.

Will contracts simply shift so that they are enforced elsewhere?

It would be a time-consuming and costly process to identify alternative jurisdictions to enforce the odious contracts; and those jurisdictions would
only be effective and credible in enforcing judgment if both parties to the contract have significant economic assets in or dealings with that
jurisdiction.

Does the UK government have sufficient power to do this?

The UK government has the power to declare that contracts would be nontransferable if done so as part of a package of sanctions set out in an EU
Directive or Regulation, or a Security Council agreement. In general, these pre-emptive contract sanctions can be applied under the same powers as
conventional sanctions.

The UK government already limits financial services which can be provided to third parties entering into contracts with Iran (for example, a third
party cannot normally buy insurance for a ship carrying goods to Iran at Lloyds of London). If it is possible to limit access to UK financial services
for third parties engaged in commerce with regimes under sanction, it should also be possible to restrict access to legal services.

Does the U.S. executive branch have sufficient power to do this?

In the United States, a declaration that odious contracts would not be enforceable could be enacted under existing law. The CGD Working Group concluded
that the U.S. president has the power to make the declaration under two statutes: the Trading with the Enemy Act of 1960 (TWEA) and the International
Emergency Economic Powers Act of 1977 (IEEPA). These statutes have customarily been used as the basis for traditional economic sanctions and are
pertinent for the proposed approach given the expansive powers that the acts authorize.

Could rogue investors take legal action to uphold contracts signed in defiance of a declaration?

It is possible that a rogue investor might turn to international dispute settlement institutions to uphold contracts signed in defiance of a declaration and that international law might oblige a U.S. or UK (or other) court to uphold an arbitral panel award enforcing the contract despite the declaration. The CGD Working Group concluded that this is unlikely in practice, for a number of reasons. In many cases appeals for arbitration would be subject to the approval of the successor regime, and thus the resolve of the successor to renounce the contracts would be sufficient to enact the proposed approach. If a rogue investor, nevertheless, prevailed in arbitration, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (known as the New York Convention) provides that third party countries may refuse to recognize or enforce the award if it “would be contrary to the public policy of that country.”